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Hello,
Could you please help to understand the following:
1) Why do we use contribution and not price when calculating sales volume variance?
2) Why should we use actual units produces/hours worked for actual production etc in calculation of materials, labour and variable OHs variances regardless whether we have closing inventory or not? Should not we use units sold related figures?Thank you in advance!
Hello,
I decided to clarify the second question from my previous post (please see above):
Question: Why should we use actual units produces/hours worked for actual production etc in calculation of materials, labour and variable OHs variances regardless whether we have closing inventory or not? Should not we use units sold related figures?
Clarification: One of the purposes of the variance analysis is to understand why actual profit differs from the budgeted one. Therefore, as we talk about “profit” we need to use figures from the P&L including Cost of sales. CoS cover costs (materials, labour etc) of the units sold and not necessarily produced. In case sales equal production CoS of units sold are equal to costs of production. But in case a company sold less than produced there will be closing inventory and therefore CoS on the P&L won’t represent costs of production. So, my question is why should we calculate variances based on units produced and not sold? For example, Materials usage variance = Materials that should be used for actual production – materials actually used for actual production. As you can see production figure is used in the formula.
I would really appreciate if you could assist with the above.
Hi there.
Ok – sales volume variance measures the effect on profit ( or contribution for a marginal costing environment ) of selling more or less units than planned. The effect needs to be measured in terms of standard profit because it is a direct measure of the effect greater or fewer sales volumes on the profits of the company. There is an argument to measure this sales volume variance using selling price – but CIMA has long preferred the standard profit method of valuing the variance.
In terms of materials… we share materials price variance over the materials purchased- despite some potentially remaining in closing stock- because all of the units purchased are affected by the higher (or lower) purchase price so the charge needs to be a calculated on all of them.
If you do have a distinction between units purchased and units used.. then material price variance is on the purchased units (because these are the ones affected by the price difference) … and material usage variance will be based on the quantity used – because these are the units actually used.
Hope that makes sense
Cath
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